Too much money to manage yourself
If you feel a little out of your league managing your own assets, hiring an investment manager is a good idea. Here's what to look out for.
NEW YORK (Money) -- Question: I've been a do-it-yourself investor for more than 20 years. But now that I've rolled my 401(k) into my IRA, I'm dealing with a rather large portfolio. I can't afford to make mistakes with this money, but the prospect of paying someone several thousand dollars a year to invest is a little unnerving. I'm considering investing some of the money myself and having an investment manager oversee $400,000 to $500,000 of it. Do you think this is a good plan? --G.C., Jacksonville, Florida
Answer: A lot of people who've been flying solo with their investments for most of their lives are beginning to question the wisdom of going it alone now that the stakes are much higher.
Which is hardly surprising. After all, it's one thing to pick a mutual fund when you're young and investing a thousand bucks or so. It's quite another trying to figure out the best way to invest the six- or seven-figure portfolio it's taken you most of your career to accumulate, and that you'll be depending on to carry you through retirement.
Make errors in the first instance and you can chalk up the loss to inexperience and go on to profit (hopefully) from your mistakes. Screw up late in life with the nest egg that's taken most of your life to build and you're...well, you get the idea.
So my take on this is that if you're feeling a bit uneasy about managing a very large portfolio, then why not delegate a portion of it to a pro as long as you can do so in a cost effective way? In a sense, you're practicing another form of diversification, diversifying against the risk of doing yourself in with poor investing decisions.
As long as you're willing to do a little legwork, you shouldn't have trouble finding any number of investment managers capable of doing a credible job for a reasonable fee.
For example, most major mutual fund and investment firms, including such well-known firms as Fidelity, Schwab, T. Rowe Price and Vanguard, have advisory divisions that offer a variety of investment management services.
Another way to go is with a private managed account (aka, separately managed account or individually managed account). In that case, you're typically working with an investment firm, financial planner or private money manager who puts together a portfolio of individual stocks or bonds, ETFs or mutual funds. The idea is that you're supposed to get a more customized and perhaps more tax-efficient portfolio than you would from, say, a mutual fund firm, although I think it's open to debate how often that's the case.
Whichever route you choose, make sure you know going in exactly how much you'll be shelling out in total fees. And I mean total.
In the case of a managed portfolio of mutual funds, for example, you might pay a fee of, say, 0.75% to 1% for the service, but you'll also have to pay the underlying fund management fees, which could easily range from 0.5% to 1.5%, bringing the total amount over 2% in some cases. In the case of a managed stock portfolio, you may have to pay for brokerage fees on top of the advisory service fee (although in many cases, the purveyors of these types of accounts combine all the fees into a single "wrap" fee).
The price you pay will depend both on company or manager you're dealing with, the amount you invest and the type of portfolio and mix of assets you end up with (generally, the higher the percentage of stocks, the more you'll pay). With some careful shopping around, however, someone in your position should be able to keep fees to roughly 1.5% or less. If you're going to be paying more than that, you need to carefully evaluate whether the manager can provide enough value to make up for the drag in costs.
I want to be clear, though, that just because you're handing over a portion of your portfolio -- whether it's $100,000, $500,000 or some other amount -- to an investment firm, you shouldn't be abdicating responsibility for that part of your nest egg. Even though someone else is investing the money, it's still your job to make sure you're dealing with someone reputable. The last thing you want to do is end up being caught in the snare of a scoundrel like Bernie Madoff.
So before you turn over your dough, check with state, federal and industry regulators to make sure the person you're contemplating entrusting your money to doesn't have a record of abusing customers or problems with authorities. This sort of due diligence can't guarantee an adviser is trustworthy -- the SEC missed Madoff, after all -- but it will still reduce your chances of hooking up with a mountebank.
Similarly, don't give any manager direct access to your funds. Instead, stipulate that your assets be held by an independent brokerage firm or custodial bank, and make sure you get statements from this entity and not just the manager himself. This will provide another layer of protection against a dishonest manager draining your account.
One final note: if you do designate a manager to invest some of your assets, make sure that the manager puts together a portfolio that complements the money you're investing on your own. So, for example, if you're focusing mostly on large-cap growth companies, the manager may want to lighten up on such shares in the portfolio he or she is building for you -- or perhaps have you refocus your efforts to avoid duplication and overweighting some sectors of the market.
Bottom line: given your anxiety about investing all your assets on your own, I think your idea to hand off a portion of your portfolio to a professional money manager makes sense. Just make sure that the manager you choose is up to the job and worthy of your trust.